FMCG Sector’s under performance

FMCG (Fast moving consumer goods) sector, as we know is comprises of products manufactured and consumed the most in day to day life. It is popularly known as a defensive stock, i.e. demand for its goods continues, even when the market is falling. As a result, this sector unlike the others provides considerable resistance during the economic downturn. Hence, they form a major part of the portfolio across the class of investors, be it retail investors or fund managers, particularly at this time. However, due to the blazing crisis like situation in India, this sector is also experiencing a tinge of it.

As investors started getting a hint of their declining portfolio values since last year, they were left only with two alternatives- Gold and FMCG sector. As a result, both had remained overvalued for quite some time. Although gold prices have remained high till late, owing to the uncertain environment, and as an excellent hedge against inflation, FMCG has lately observed a shift in the cycle. Hence, although gold might still be a favorite, FMCG is no more a desirable stock.

The outperformance of the sector till late despite others experiencing a downfall can be attributed to the government expenditure, in the form of generous subsidies, MNREGA Scheme and plunging commodity prices in the last quarter. All these factors had facilitated volume and hence revenue growth. As a feedback effect of these measures the fear of retail inflation crossing 10% has been impending, thus, tying the hands of the central bank in liquidating the market.

The tight monetary situation that is being experienced in the banking sector and discretionary goods sector has now fed into the FMCG sector. The other factors include persistently high inflation, increasing unemployment and tax cuts in the profits made by the companies, according to the budget of the current fiscal year. So, it did not contribute much to the earnings in the sector, thus making valuations sky high. But, this bubble had to get busted and

FMCG is now no more in the safe haven category of the portfolio. This is a big concern for the investors and the health of the economy. It can be described as a barometer for measuring the economic performance of the country. Low earnings growth in the sector can have major implications for the investor sentiment all over the world. Its underperformance will create questions on the economic viability and add to the chaos in the market. We have to go back to the fundamentals, and with a strong heart, we need to shift our focus from the depreciating rupee. The rupee is artificially hooked at the 65 levels; it has to come down more anyway. So it is essential for the policy makers to stop intervening in the forex market, and take steps with a long-term perspective in their mind because if we don’t, then markets underperformance will only act like a fuel to fire on the depreciating rupee.

We hope, RBI’S recent steps which had artificially raised interest rates so high in order to bring the FIIs will be reversed by the newly appointed governor Raghuram Rajan after he assumes his office on September 5th. All this may drive the FIIs out for some more time, resulting into further depreciating of the rupee, yet it will help in setting the economy back on track firstly through the IT stocks, then the banking and the manufacturing sector(discretionary goods especially), followed by FMCG.

Divya Shukla: A graduate with a Major in Economics degree from the renowned University of Delhi and is about to enroll for Master’s program in Financial Economics in Babasaheb Bhim Rao Ambedkar University, Lucknow. Whilst this journey of financial economics is a career career path, has also developed a diverse field of interests, (especially in Economics, Politics, and Finance).